Inflation Report February 2015

Costs and prices

Chart 4.1 CPI inflation expected to fall further in Q1Bank staff projection for near-term CPI inflation(a)

(a) The red diamonds show Bank staff’s central projection for CPI inflation in October, November and December 2014 at the time of the November Report. The blue diamonds show the staff projection for January, February and March 2015. The bands on either side of the diamonds show uncertainty around these projections based on one root mean squared error of projections for CPI inflation one, two and three months ahead made since 2004.

Chart 4.2 Energy prices are likely to continue to weigh onCPI inflationDirect contribution of energy prices to CPI inflation(a)

Sources: Bloomberg, Department of Energy and Climate Change, ONS and Bank calculations.

(a) Contributions to annual CPI inflation. Data are non seasonally adjusted.(b) Bank staff estimates. Electricity, gas and other fuels estimates are conditioned on the assumption that utilities companies reduce gas prices by an average of 4¼% by the end of May 2015. Fuels and lubricants estimates use Department of Energy and Climate Change petrol price data for January 2015 and are then based on the February 2015 sterling oil futures curve shown in Chart 4.4. The CPI weights used to produce these contributions are 2014 weights, shown in parentheses.

Chart 4.3 Global commodity prices, particularly oil prices, have fallenUS dollar oil and commodity prices

Sources: Bloomberg, S&P indices and Thomson Reuters Datastream.

(a) US dollar Brent forward prices for delivery in 10–21 days’ time.(b) Calculated using S&P US dollar commodity price indices.(c) Total agriculture and livestock S&P commodity index.

Chart 4.4 Wholesale gas prices have also fallen, but by muchless than oil pricesSterling oil and wholesale gas prices

Sources: Bank of England, Bloomberg, Thomson Reuters Datastream and Bank calculations.

(a) Brent forward prices for delivery in 10–21 days’ time converted into sterling.(b) One-day forward price of UK natural gas.(c) Futures prices at the time of the November Report are averages during the fifteen working days to 5 November 2014. Futures prices at the time of the February Report are averages

during the fifteen working days to 4 February 2015.

Chart 4.5 Oil supply growth increased in 2014Growth in oil supply and demand

Sources: International Energy Agency Oil Market Report© OECD/IEA 2015 and Bank calculations.

Chart 4.6 Sterling’s appreciation has weighed on UK import pricesUK import and foreign export prices excluding fuel

Sources: Bank of England, CEIC, Eurostat, ONS, Thomson Reuters Datastream and Bank calculations.

(a) Domestic currency non-oil export prices of goods and services of 49 countries weighted according to their shares in UK imports, divided by the sterling effective exchange rate. The sample does not include any major oil exporters. In 2014 Q3, export prices for Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Iceland, Lithuania, Pakistan, Philippines, Poland, Sweden, Switzerland and Turkey are assumed to grow at the same rate as export prices in the rest of the world excluding the euro area and the United States.(b) Goods and services deflator excluding fuels and the impact of MTIC fraud.(c) Domestic currency non-oil export prices as defined in footnote (a).

Chart 4.7 Unit labour cost growth picked up slightly in2014 Q3Decomposition of four-quarter whole-economy unit labour cost growth(a)

Sources: ONS and Bank calculations.

(a)Unit labour costs are calculated as labour costs divided by GDP. GDP is based on the MPC’s best collective judgement of the final estimate of GDP.(b)Self-employment income is calculated from mixed income, assuming that the share of employment income in that is the same as the share of employee compensation in nominal GDP less mixed income.

Chart 4.8 Survey indicators point to further pickup in pay growthPrivate sector earnings and indicators of pay growth

Sources: Bank of England, BCC, Incomes Data Services, KPMG/REC/Markit, the Labour Research Department, ONS and XpertHR.

(a)The Bank’s Agents’ scores and the BCC survey are produced by weighting together indicators for the manufacturing and service sector according to their employment shares.The Bank’s Agents’ scores are a quarterly average of monthly data, and are available from June 1998.(b)Four-quarter moving average measure. Non seasonally adjusted.(c)The REC measure is produced by weighting together survey indices for the pay of permanent and temporary placements using shares in employment; quarterly averages.(d)Excludes bonuses and arrears of pay.

Chart 4.9 Staff retention and recruitment likely to be pushingup labour costs; inflation expectations pushing downAgents’ survey: factors affecting growth in total labour costs per employee(a)

(a) The survey asked respondents how they expected the factors listed to affect growth in total labour costs per employee in 2015 compared with growth in 2014. Based on 436 responses to a survey carried out by the Bank’s Agents between December 2014 and January 2015. Responses have been weighted by employment.

Chart 4.10 Manufacturing output prices fell but inflation was broadly stable in the service sectorOutput prices

Sources: ONS and Bank calculations.

(a)Headline measure, which includes food, beverages, tobacco and petroleum products. Data are non seasonally adjusted and are to 2014 Q4.(b)Based on the Services Producer Price Index. Data are non seasonally adjusted and are to 2014 Q3.

Tables

Table 4.A Monitoring the MPC’s key judgements

Table 4.B Energy, food and other goods inflation explain around two thirds of the inflation undershootContributions to December 2014 CPI inflation relative to the pre-crisis average

Sources: ONS and Bank calculations.

(a) Adjusted for the 0.37 percentage point downward bias from clothing that existed until 2010.(b) Totals may not sum exactly due to rounding.

Table 4.C Wage growth has picked upWhole-economy earnings

Sources: Bank of England, Incomes Data Services, the Labour Research Department, ONS and XpertHR.

(a) Figures for 2014 Q4 are estimates based on data for October and November and Bank staff’s projections for December.(b) Whole-economy total pay excluding bonuses and arrears of pay.(c) Percentage points. The bonus contribution does not always equal the difference between total AWE growth and AWE regular pay growth due to rounding.(d) Average over the past twelve months, based on monthly data.

Table 4.D Surveys point to a slight pickup in prices charged bymanufacturersSurvey measures of prices charged(a)

Sources: Bank of England, BCC, CBI and Markit/CIPS.

(a) The BCC and CBI surveys ask about prices over the next three months. The Markit/CIPS surveys ask about prices over the past month and the Agents’ scores refer to manufacturers’ domestic prices and business to business services prices over the past three months compared with a year earlier. The BCC data are non seasonally adjusted.(b) The averages for the Markit/CIPS manufacturing and CBI services surveys are since the series began in November 1999 and 1998 Q4 respectively. The average for the Agents’ scores for services is since January 2005.

Table 4.E Inflation expectationsIndicators of inflation expectations(a)

Sources: Bank of England, Barclays Capital, Bloomberg, CBI (all rights reserved), Citigroup, GfK NOP, ONS, YouGov and Bank calculations.

(a) Data are non seasonally adjusted.(b) Dates in parentheses indicate start date of the data series.(c) Financial markets data are averages from 1 January to 4 February 2015. YouGov/Citigroup data are for January 2015.(d) The household surveys ask about expected changes in prices but do not reference a specific price index, and the measures are based on the median estimated price change.(e) CBI data for the manufacturing, business/consumer services and distribution sectors, weighted together using nominal shares in value added. Companies are asked about the expected percentage price change over the coming twelve months in the markets in which they compete.(f) Instantaneous RPI inflation one year ahead implied from swaps.(g) Bank’s survey of external forecasters, inflation rate three years ahead.(h) Instantaneous RPI inflation three years ahead implied from swaps.(i) Five-year, five-year forward RPI inflation implied from swaps.

The impact of lower oil priceson the UK economy

Chart A The impact of a fall in oil prices on inflation wouldbe short-livedContributions to inflation of a 10% fall in oil prices

Chart B Demand is boosted by both domestic andinternational factorsContributions to GDP of a 10% fall in oil prices

Recent developments inUK inflation expectations

Chart A Households’ short-term inflation expectations fell alongside CPI in 2014 Q4Survey measures of households’ inflation expectations one year ahead(a)

Sources: Bank of England, Barclays Capital, Citigroup, GfK NOP, ONS and YouGov.

(a)The questions ask about expected changes in prices over the next twelve months, but do not reference a specific price index. All measures are based on the median estimated price change and are non seasonally adjusted. CPI inflation is non seasonally adjusted.

Chart B Households’ longer-term inflation expectationsSurvey measures of households’ inflation expectations beyondone year ahead(a)

Sources: Bank of England, Barclays Capital, Citigroup, GfK NOP and YouGov.

(a) Measures do not reference a specific price index and are based on median estimated price changes. Data are non seasonally adjusted.

Chart C Market-based measures of inflation expectations are around pre-crisis averagesMarket-based indicators of inflation expectations

Sources: Bloomberg and Bank calculations.

(a)Five-year, five-year forward RPI inflation implied from swaps.(b)Instantaneous RPI inflation three years ahead implied from swaps.

Chart D A majority of large companies expect inflation to bearound target in two years’ timeDeloitte CFO Survey of large companies’ inflation expectationstwo years ahead(a)

Source: Deloitte.

(a)The question asks: ‘Where do you think CPI inflation will be in two years’ time?’. Data are non seasonally adjusted.